Option Investor

Daily Newsletter, Wednesday, 11/8/2017

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Priced for Perfection

by Keene Little

Click here to email Keene Little
The stock market is priced for perfection as earnings season winds down, the tax plan is debated and North Korea remains a thorn in the side of its neighbors and the U.S. Everything has to work out perfectly from here in order to keep the market from becoming disappointed and right now the bulls are betting on that outcome.

Today's Market Stats

The market celebrated the completion of one year following Trump's election with a little push higher for the rally (more so for the techs). Market participants continue to bet on a bullish outcome for the new tax plan that's now being debated. Trump is in Asia and one of the reasons is to figure out what to do about North Korea. Traders are betting on a bullish outcome. Earnings season has turned a little weaker but traders are betting on a bullish outcome. Priced to perfection, the market is vulnerable and could soon disappoint the bulls if some stronger buying pressure doesn't show up soon.

The one-year rally following Trump's election certainly has the momentum behind it, although that's been weakening, after completing a very good year. In fact it's the best post-election 1-year rally since 1945, which also happened to be the end of WWII and the launch of one of the strongest economies in the world. That can hardly be said about our economy today. In fact this time there is such a strong disconnect between the economy and the stock market that it makes one wonder why we've had such a strong rally.

The answer to the question about the rally over the years is of course liquidity. The Fed and other global central banks have created so much money and it continues to look for investment opportunities. Asset prices, especially the stock market and housing market, have enjoyed all that newly-created money that's looking for a home. The rally has less to do with fundamental values and more to do with simply looking for a place to invest the money. Take the money away and the house of cards stands vulnerable, which is one reason why there should be more concern about the Fed taking away the punch bowl. It's probably because all that drinking over the years and the inebriated effect on investors is going to take time to register. Money in -- assets rise, money out -- assets...

Today's rally was minor in the blue chips but it was good enough to tack on another "new all-time closing high." That keeps the sheeple coming in and buying more (the stock market is one of the few places where people get excited about paying higher prices for something). But there's also very little negative news and that helps people stay positive, which is what we see in sentiment surveys. As long as the people are feeling upbeat there will be a desire to stay bullish about the stock market.

The bullish sentiment is what the bears are fighting and it's the reason they've had to stay in their caves until there's evidence of a top to the current rally. Most analysts don't see what could derail the market and that also helps the bulls. While the market has a habit of surprising the most people at the most unexpected times, that's not something most investors are worried about at the moment. They'll keep paying the higher prices as long as they believe prices will only continue to go higher. What's amazing is how many investors today have not experienced the emotional angst when the stock market stops going up.

As for tonight's charts, the #1 takeaway is the fact that there's no threat to the establish uptrends in all the indexes. The RUT is weaker but there's no impulsive decline to say with certainty that a top is in place. As I'll show, there are reasons to suspect a top could be very close now (possibly by Friday) the fact remains that any attempt to pick a top is simply an attempt to catch all those rising knives. Getting cut is a real possibility if you attempt to sell this market.

S&P 500, SPX, Weekly chart

With the tiny little weekly candles, especially the last three weeks, there's been very little change to the SPX weekly chart. Price remains near the trend line along the highs since April 2016 and the midline of its up-channel from 2010-2011. With trendline resistance holding and the weekly MACD threatening to roll over it's looking vulnerable to topping at any time. SPX needs a strong break above 2610 to have it looking more bullish.

S&P 500, SPX, Daily chart

Since the October 25th low it's looking like we're into the 5th wave of the rally from August. It's forming a rising wedge pattern, which is common for 5th waves, especially following a move that has gone too far too fast. The EW term for the pattern is an ending diagonal and that's a fitting term for what I'm seeing here. But it's also why it would look more bullish if it breaks out of the pattern with a rally above 2610. Confirmation of a top doesn't come until SPX drops below the November 2nd low at 2566.

Key Levels for SPX:
- bullish above 2606
- bearish below 2566

S&P 500, SPX, 60-min chart

The 60-min chart shows a closer view of the rising wedge pattern for what should be the final leg of the rally. As always with these patterns, they can continue longer than it seems possible and I'm depicting a couple of ideas for how price might play out from here. My best guess at this moment is shown in bold green and red, which calls for a continuation of the rally on Thursday into a top by Thursday or Friday. But it will have to be watched carefully since it could chop its way higher into next week. Next week is opex and that will be one reason why the market might hold up a little longer (light-green dashed line up to about 2610 next week).

Dow Industrials, INDU, Daily chart

Since October 24th, when the Dow first reached the trend line along the highs from April 2016 - March 2017, it has remain stuck beneath the line. For the past six trading days it has tested the line but has been unable to break through resistance and now it has dropped out of its up-channel from the beginning of September. It would be accurate to say the Dow has dribbled out the side of the channel since it has not broken down.

If the Dow does manage to get above the trend line, near 23630, watch for a possible back-test of the bottom of the up-channel, which will be near 23740 on Friday. Another possibility is a dip on Thursday that could lead to one final test of the 2016-2017 trend line near 23640 on Friday. The bulls need to see a stronger move above 23800 in order to negate the bearish setup here.

Key Levels for DOW:
- bullish above 23,800
- bearish below 23,350

The techs have been out in front of this rally, helped of course by the FAANG and some other big-cap tech stocks. The sentiment is certainly behind the move, which can be seen graphically in the bottom chart below (NDX is the top chart). It's the Rydex Asset Ratio, which compares assets in bear funds plus money market funds and bull funds.

Rydex Asset Ratio, Monthly chart

The Rydex asset ratio has spiked up in the last month to new all-time highs, which now has it well above where it was at the height of the craziest dot.com high in 2000. When the retail crowd buys into a move (literally) it's usually a good time to be thinking about taking the other side of the trade.

Nasdaq-100 index, NDX, Daily chart

Since the November 2nd low for NDX it has been working its way higher as it finds support at its uptrend line from October 25th, which is where it closed today. If you look at the trend line on a 60-min chart you'd see how each hourly candle hugged the trend line. Any decline from here would break the uptrend line so the bulls can't let up. But the top of a parallel up-channel for the rally from July is now close, near 6370, which is the upside potential from here. NDX would be more bullish above 6400 and the first sign of trouble would be a drop below Tuesday's low near 6300.

Key Levels for NDX:
- bullish above 6400
- bearish below 6194

Russell-2000, RUT, Daily chart

The RUT is setting up for a big move. It has essentially been consolidating in a choppy pattern for over a month and the bullish interpretation of the pattern, calling it a bull flag, says we should see a breakout and potentially right from here. The bearish interpretation says we've had a series of 1st and 2nd waves to the downside and that it's now ready to break down.

A breakdown would actually be a stronger move than a rally but in either case it's likely going to be a strong move. At the moment it's a flip of a coin for direction but I'm leaning into the bear camp here (I'll quickly correct my leaning posture if I see an impulsive move back up since all we've seen so far are a bunch of 3-wave moves over the past month+).

The bullish setup here is the bullish hammer candlestick with the bounce off support this morning. Between its 50-dma at 1471 and its broken trend line along the highs from 2007-2015 (which the RUT had broken above with the big rally on September 27th), near 1465, the bulls have a strong reason to buy the pullback. This morning's low was 1469 and they'll need to drive the RUT below 1465 (and keep it below that level) to prove a top is likely already in place, in which case I would expect strong selling to follow.

Key Levels for RUT:
- bullish above 1515
- bearish below 1465

10-year Yield, TNX, Weekly chart

Last week I showed an expectation for TNX to pull back from resistance at its downtrend line from 1988-2007, which it did, but so far this week we have just a little doji. I could make the argument that we have a small impulsive decline from the October 25th high, which would mean the trend has changed to the downside and that any bounce in the coming days would be a good shorting opportunity (buying opportunity for bonds), using a stop above the October 25th high at 2.475. There is the potential for only a bounce up to a price projection near 2.51, above which TNX would turn more bullish.

High Yield Corporate bond fund, HYG, Weekly chart

Another bond fund to watch carefully is HYG since this is a good indicator of bullish sentiment. I last updated its weekly chart in August after it dropped out of its small rising wedge from March and the top on July 26th. It had found support at its 50-week MA and bounced back up to the bottom of the rising wedge where it hung on for another 3 months before falling away from its bounce high on October 23rd. Today's strong decline has it breaking support at its 50-week MA at 87.76 and it's now looking like a breakdown has started. The large split between SPX and HYG is likely to be corrected with an SPX decline rather than a rally in HYG.

KBW Bank index, BKX, Weekly chart

Yesterday the banks got hammered to the downside and that followed two weeks of struggling at its trend line along the highs from 2011-2014. It smashed through support at its 20-dma, at 100.79, which had supported the previous pullback into the mid-October lows, and appears headed for a test of its 50-dma, which is climbing and currently near 98 (it closed today at 98.78). A drop below its October 13th low at 97.79 would confirm a top is likely in place and the next level of support would be its 50-week MA and its uptrend line from June 2016, both currently coinciding at 94.13.

Transportation Index, TRAN, Weekly chart

The TRAN topped out on October 13th and closed back below its July 14th high on Monday. It's leaving a fairly large negative divergence compared to the Dow at this point and Dow Theory says the new highs for the Dow, without the TRAN confirming those highs, is bearish. The weekly oscillators for the TRAN have rolled over following bearish divergence since last December and it's not looking like the negative divergence with the Dow is going to be resolved with a rally in the TRAN. That leaves the Dow vulnerable.

U.S. Dollar contract, DX, Daily chart

On October 26th the US$ climbed about a neckline near 94, back-tested with a pullback on November 3rd and now appears ready to push higher. Unless it drops below 94 it now is on a bullish path and the up-channel for its rally from September is the guiding channel. A rally to the top of the channel would also have it testing its broken 200-dma, both of which will probably cross near 96.40 next week

Gold continuous contract, GC, Daily chart

I've been on the fence with gold but with the dollar now looking more bullish I think it's going to pressure gold to the downside. Between the dollar and bitcoin's (BTC) strength there seems to be less upside pressure on gold. The one big plus for gold is if the stock market tanks due to some kind of extraneous event we'll likely see a rush into gold.

Barring anything bad happening, gold's struggle to get off the mat following a bounce off its broken downtrend line from 2011-2016 (it's the second back-test) tells us it's weak, which increases the probability (not guarantee) that it's going to break down further. The larger bearish pattern continues to suggest we have not seen a long-term bottom for gold yet. A retest of the 2008 low at 681 is a real possibility over the coming years.

I've never been a strong proponent of buying gold as an alternate currency. I like owning a little bit of gold and silver for emergencies (for when North Korea sets off an EMP above us and shuts the lights off, wink) but I do like the digital currencies as an alternate currency. Long live the cryptos and prove the Jamie Dimons of the world spectacularly wrong (Disclosure: I own BTC and a few other alt coins). I've found the digital currencies to trade much better technically than do stocks, which are now highly manipulated. I'd also love to see the money power taken away from governments and central banks. But I digress and who knows, maybe gold will do better if BTC spectacularly fails.

Oil continuous contract, CL, Weekly chart

Oil has had a bullish three weeks and has firmly broken above a possible inverse H&S neckline (May 2015 - January 2018), which gives us a price objective of 85. There is of course no guarantee it will get there but that's the bullish potential over the next several months. But the bulls will not have an easy go of it. Oil is now nearing price-level S/R near 58.50 and its 38% retracement of its 2013-2016 decline, which is at 58.97. It's declining 200-week MA is also nearing 58.50 and with oil overbought on the daily chart I think it's going to be tough making much further progress before pulling back and resting.

If oil pulls back in small choppy consolidation patterns we could see a rally to the top of a possible rising wedge pattern, currently near 61 and which will be near 62 in mid-December. Above 62 would clearly be more bullish since a lot of resistance will have been broken by then. I'm not convinced oil is going to rally strong from here since the longer-term pattern looks bearish but it doesn't prevent a higher bounce pattern before turning back down next year.

Economic reports

Other than the Michigan Sentiment survey results on Friday the rest of the week remains a very quiet time for economic reports.


The market remains bullish as long as pullbacks remain corrective. There's no reason a bear should even think about shorting this market since there's no evidence yet that a top is in place. Based on the price pattern, trend lines, Fibs, wave count, bearish divergences, and more, I don't think there's much upside left to this rally. In fact I see plenty of reasons why the rally could finish on Thursday or Friday. I also see a reason why and how the market could remain buoyant through next week (opex). And of course my opinion about a nearby top is just that. Again, there's no evidence of a top and that's reason enough for bears to stay away.

That being said, I think it's a very risky time for bulls. We see lots of evidence of complacency, such as the Rydex Assets ratio shown at the beginning of this report, a low VIX, Investors Intelligence bullish sentiment, etc. This complacency combined with an overbought market that's showing weakening momentum and market breadth makes for a dangerous time to be long the market, especially since we have such a large air pocket below us and a huge problem with ETFs that could go no-bid when the selling starts. Most investors have no idea about these risks.

I keep harping on the use of portfolio insurance because I know a lot of investors, especially retirement account holders, won't sell. There are many analysts telling investors to simply hold on and buy the dips from here. That could work nicely if we're only looking for a short-term top but the risk I see is a more permanent top, one that could last for decades. I just think that kind of risk is too great to ignore. If we do get a larger decline that looks more like a pullback correction I'll be one of the first to warn about another rally coming. With that any portfolio insurance can be cashed in and go back to being a full investor. And with that I offer my soap box to the next speaker.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

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New Option Plays

Rebound in Progress

by Jim Brown

Click here to email Jim Brown

Editors Note:

MDCO fell sharply on earnings but has recovered to close at a two-week high today.


MFCO - Medicines Co - Company Profile

The Medicines Company, a biopharmaceutical company, provides medicines for patients in acute and intensive care hospitals worldwide. The company markets Angiomax, an intravenous direct thrombin inhibitor used as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, and for patients undergoing percutaneous coronary intervention; Ionsys, a fentanyl iontophoretic transdermal system for the short term management of acute postoperative pain for adults requiring opioid analgesia in the hospital. It also markets Minocin IV, an intravenous formulation of a tetracycline-class antibiotic used for the treatment of infections due to susceptible strains of designated gram-negative bacteria; and Orbactiv, an intravenous antibiotic used for the treatment of adult patients with acute bacterial skin and skin structure infections, or caused or suspected to be caused by susceptible isolates of designated gram-positive microorganisms. The company's approved products include Adenosine, Amiodarone, Esmolol, and Milrinone for acute cardiovascular; Azithromycin and Clindamycin for serious infectious disease; and Haloperidol, Midazolam, Ondansetron, and Rocuronium for surgery and perioperative treatment. Its research and development stage products comprise Carbavance, an antibiotic agent that has completed Phase III development stage for the treatment of hospitalized patients with serious gram-negative bacterial infections; Inclisiran, a synthesis inhibitor for the potential treatment of hypercholesterolemia; and MDCO-700, an intravenous anesthetic agent developed for moderate or deep sedation and general anesthesia in patients undergoing diagnostic or therapeutic procedures. The Medicines Company has a collaboration agreement with Alnylam Pharmaceuticals, Inc.; SciClone Pharmaceuticals; and Symbio Pharmaceuticals Limited. Company description from FinViz.com.

Earnings January 25th.

MDCO reported a loss of $1.19 that beat estimates for a loss of $1.23. However, revenue of $16.9 million missed estimates for $22.9 million.

The company announced the layoff of 85% of its workforce from 410 workers to only 60. As part of the restructuring the company is divesting its infectious disease business by the end of 2017. The revenue from the divestiture should allow the company to "aggressively" move its drug candidate through late stage clinical development. The drug, inclisiran is part of a new class of cholesterol lowering therapies called PCSK9 inhibitors. The phase three trial started the first week of November. MDCO is partnering with Alnylam (ALNY) on the trial. There are 1,500 in the trial at 100 clinical sites in eight countries. This is only one of four concurrent trials covering nearly 3,500 patients. The initial trials were very positive.

The stock declined to $28 on the dramatic layoffs and traded sideways for two weeks. A rebound has begun.

Buy Jan $32 call, currently $2.30. Initial stop loss $27.85.


No New Bearish Plays

In Play Updates and Reviews

Melt Up Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P both posted single digit gains despite trading negative most of the morning. The indexes refuse to decline as every minor dip is bought. The Nasdaq even posted a decent 21 point gain despite a dozen or more large declines on earnings disappointments. It appears there is no decline in our future because the indexes manage to squeeze out gains even on bad news.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

GILD - Gilead Sciences
The long call position was entered at the open.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AABA - Altaba - Company Profile


No specific news.

Alibaba's new Global Shopping Festival is coming on November 11th and that will produce a lot of headlines in the days ahead of the event. In 2016, they sold $17.7 billion on that day, up 32% from the prior year. With 549 million active customers, they could do well over $20 billion this year.

Original Trade Description: October 18th.

Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com

Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments. They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.

Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free. Obviously Altaba is reactive to Alibaba movement so there will still be some volatility, it is just comes with a lower risk.

Alibaba is growing much faster than Amazon and they have a larger market with 4.5 billion consumers in Asia.

Alibaba reports earnings on Nov 2nd and Altaba reports on Nov 29th. Because of the lower volatility and cheaper option prices, we can own AABA over the BABA earnings and profit from any post earnings gains.

Last week Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.

The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.

BABA shares fell $6 on the announcement because of the impact to profits. AABA shares followed Alibaba shares down and they bounced today off the 30-day average, which has been strong support. If the trend holds, this should be a buying opportunity.

Update 11/2: Alibaba reported an outstanding quarter with a 61% rise in revenue. They raised guidance for 2018 for a 49-53% rise in revenue, up from prior guidance of 45-49%. Their cloud computing business revenue rose 99%. Earnings of $1.29 bear estimates for $1.04. Revenue of $8.29 billion beat estimates for $7.86 billion. Monthly actuve users rose 3.8% to 549 million. The current quarter is going to show explosive growth given the expanded Single Day promotion.

I am using the Jan options so there will still be earnings expectations in the premium when we exit.

Position 10/19/17:

Long Jan $70 call @ $3.10, see portfolio graphic for stop loss.

ADI - Analog Devices - Company Profile


No specific news. Holding at the record highs.

Original Trade Description: Sept 30th.

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.

Expected earnings Nov 29th.

ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.

They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.

Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.

Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.

I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.

AXP - American Express - Company Profile


No specific news. The financial sector has been declining for two days.

Original Trade Description: November 4th

American Express Company, together with its subsidiaries, provides charge and credit payment card products and travel-related services to consumers and businesses worldwide. It operates through four segments: U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services. The company's products and services include charge and credit card products, as well as other payment and financing products; network services; expense management products and services; travel-related services; and stored value/prepaid products. Its products and services also comprise merchant acquisition and processing, servicing and settlement, merchant financing, point-of-sale marketing, and information products and services for merchants; and fraud prevention services, as well as the design and operation of customer loyalty programs. The company sells its products and services to consumers, small businesses, mid-sized companies, and large corporations through online applications, direct mail, in-house teams, third-party vendors, and direct response advertising. American Express Company was founded in 1850 and is headquartered in New York, New York. Company description from FinViz.com.

The company was founded in 1850. Did you really think a temporary blip from the change at Costco was going to impact them long term? Of course not although analysts were pretty negative for several months. Since that fiasco shares have recovered nicely and closed at a record high on Friday.

They posted Q3 earnings of $1.50 that beat estimates for $1.47. Revenue of $8.44 billion beat estimates for $8.32 billion. Revenues rose 9% and earnings rose 19%. They guided for full year earnings of $5.80-$5.90, up from prior guidance of $5.60-$5.80.

Earnings January 17th.

The CEO said "we are completing a two year turnaround ahead of plan with strong revenue and earnings growth across all our business segments. We added products and benefits, shown continued strength in acquiring new customers and expanded our merchant network. Loan growth continued to be strong and credit metrics were again in line with our expectations. We contained operating costs and reallocated a significant part of those savings to fund many of the initiatives that are driving growth across the business."

Shares have been moving mostly sideways with a slight upward bias the last 7 days but I believe they are about to break out for a new leg higher.

Position 11/6/17:

Long Jan $100 call @ $1.67, see portfolio graphic for stop loss.

COST - Costco - Company Profile


No specific news. Major breakout on no news.

Original Trade Description: October 14th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Update 10/18: Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

Update 10/20: Oppenheimer reiterated an outperform rating and $185 price target. They listed 5 reasons why Costco is still a buy. Management optimism, credit card change is over, the new delivery options are just starting, IT investments over the last several years are paying off and costs are declining, improved advertising showing the extended benefits of being a member.

Update 11/2: Costco reported a 10.1% increase in sales for October to $10.02 billion. For the first 8 weeks of their fiscal 2018 sales have risen 11.3% to $19.87 billion. Same store sales for that 8-week period was +8.1% in the USA, +9.0% in Canada, +9.3% international. Companywide comps sales were +8.3% with a 32.2% in ecommerce sales. I can't wait to see the Whole Foods comp sales numbers but I doubt Amazon will break them out. There is ZERO impact on Costco from the Whole Foods/Amazon acquisition.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.

GILD - Gilead Sciences - Company Profile


Mizuho raised the price target to $83. The analyst said Gilead did not overpay for Kite given the strength of the drug pipeline. Recent trial results have been positive on multiple drugs. The analyst reminded that Gilead paid $11 billion for Pharmasset in 2011 that enabled them to corner the Hep-C market for 5 years.

Original Trade Description: November 7th

Gilead Sciences, Inc. discovers, develops, and commercializes medicines in the areas of unmet medical needs in Europe, North America, Asia, South America, Africa, Australia, India, and the Middle East. The company's products include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Vemlidy, Epclusa, Harvoni, Sovaldi, Viread, and Hepsera products for treating liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B. In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration. Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis C virus and hepatitis B virus; hematology/oncology; cardiovascular; and inflammation/respiratory diseases. The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., Galapagos NV., and Spring Bank Pharmaceuticals, Inc. Company description from FinViz.com.

Earnings January 25th.

Shares of Gilead surged in late August after the company raised guidance on drug sales. Those gains faded as they approached the Q3 earnings date. The declined even further after the company lowered guidance on sales because of increased competition. However, producing $25 billion a year in revenue and having multiple drugs in the pipeline with one of them expected to produce $3.5 billion in 2018, is a reason to buy this stock on a dip to support.

The company reported earnings of $2.27 compared to estimates for $2.13. Revenue of $6.5 billion also beat estimates for $6.4 billion. Net income was $2.7 billion.

Gilead bought Kite Pharma for $12 billion earlier this year to gain access to their cancer immunotherapy drugs. The company is working on logistics for for launching sales of the newly approves non-Hodgkin lymphoma drug Yescarta developed by Kite. The drug costs $373,000 for a one-time treatment.

Gilead warned that Hep-C revenue was declining as fewer patients were deemed eligible for treatment and there was higher competition from companies like AbbVie. Sales of their Hep-C drugs declined from $3.3 billion to $2.2 billion in Q3. They lowered full year guidance for Hep-C from $9.5 billion to $9.0 billion.

At the same time they raised full year guidance on all sales from $24.0 billion on the low side to $24.5 billion with the upper rage at $25.5 billion.

While Hep-C sales may be slowing thanks to a 95% cure rate there are plenty of other drugs in the pipeline. Gilead has plenty of cash to develop and market new drugs. This is a good company and the drop to support is a buying opportunity.

Position 11/8/17:

Long Feb $75 Call @ $3.45, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


PayPal launched domestic payment services in India with 1.324 billion people.

Original Trade Description: October 25th.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

They reported Q3 earnings of 46 cents, up 32%, that beat estimates for 44 cents. Revenue of $3.24 billion, up 21% and beat estimates for $3.17 billion. They guided for the current quarter for earnings of 50-52 cents and full year earnings of $1.86-$1.88. Mobile payment volume rose 54% to about $40 billion. Total payments rose 31% to $114 billion. Free cash flow rose 36% to $841 million and they have $7.1 billion in cash. They added 8.2 million active accounts with net new actives up 88%. They now have 218 million active customer accounts with 17 million merchants. They processed 1.9 billion payments, up 26%.

Q4 revenue is expected to rise 20-22% to $3.570-$3.630 billion. Paypal said payment platform Venmo was on track with expectations. The platform processed $9.1 billion in payment volume, a 93% YoY increase.

Expected earnings January 18th.

The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.

Pacific Crest Securities said their market cap of $85 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.

In mid August Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.

Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.

Shares posted an 81% gain on Wednesday when the market was down on much needed profit taking. Investors looking for a buying opportunity are going to be left behind.

Position 10/26/17:

Long Jan $72.50 call @ $2.95, see portfolio graphic for stop loss

STX - Seagate Technology - Company Profile


Seagate announced AI powered hard drives for video monitoring.

Original Trade Description: November 6th

Seagate Technology plc provides data storage technology and solutions in Singapore, the United States, the Netherlands, and internationally. The company manufactures and distributes hard disk drives, solid state drives and their related controllers, solid state hybrid drives, and storage subsystems. Its products are used in enterprise servers and storage systems applications; client compute applications, primarily for desktop and mobile computing; and client non-compute applications, including various end user devices, such as portable external storage systems, surveillance systems, network-attached storage, digital video recorders, and gaming consoles. The company offers external backup storage solutions under the Backup Plus and Expansion product lines, as well as under the Maxtor and LaCie brand names available in capacities up to 120 terabytes. It sells its products primarily to original equipment manufacturers, distributors, and retailers. Company description from FinViz.com.

Earnings January 22nd.

Seagate posted earnings of 96 cents that beat estimates for 86 cents. Revenue of $2.63 billion beat estimates for $2.53 billion despite a 6% decline. The declared a quarterly dividend of 63 cents payable January 3rd to holders on Dec 20th. During the quarter they returned $350 million to shareholders through dividends and stock repurchases. Cash on hand was $2.3 billion.

The company said demand was increasing as the move to cloud storage was creating the need for massive amounts of data bandwidth, storage, manipulation and retrieval. The average storage per drive shipped was 1.7 terabytes with the average selling price $64 per drive. Hard drive storage is a commodity business where existing technology is competing on a byte per dollar basis and new technology is the only way to expand ASPs. Seagate is progressing in that battle with larger and larger drives that operate at faster speeds and last longer between failures. With many businesses moving to SSD storage, Western Digital has the lead there because of its partnership with Toshiba. However, Seagate just signed on to the consortium that is buying the other half of the Toshiba memory business that WDC does not own. This will enable Seagate to acquire memory for the lowest prices possible and compete with WDC in the SSD arena.

Seagate shares spiked from $35 to $40 on the earnings. They declined back to $36 where they found support and it appears a rebound has begun. Shares were already trending higher before the earnings and this could be an extension of that trend.

Position 11/7/17:

Long Jan $39 call @ $1.14, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


2017 has had the overall lowest volatility in more than a decade. Without a market crash this position will expire worthless.

This is insurance against a potential decline.

This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time. It has been 494 days since a 5% decline.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


The Dow continues to be weak despite the 6-point gain today. The option is only worth 29 cents today. With the Dow momentum slowing, I think we should hold it until it expires. Our strike is only about 330 Dow points from today's close.

Original Trade Description: October 21st.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is extremely overbought. It is due for a rest. There are 12 Dow components reporting earnings this week. Volatility will occur but we do not know in which direction. Since all the Dow gainers are already up strongly over the last several weeks, there is a good chance we could see some declines.

This is highly speculative. I am using November options because they are cheap but they will require a substantial move in the next ten days or they will decay quickly. This will be a quick trade.

Buy Nov $232 put, currently $1.86, no initial stop loss.

OMC - Omnicom Group - Company Profile


No specific news. Only 8 cents from the 2-yr low close.

Original Trade Description: Nov 1st.

Omnicom Group Inc., together with its subsidiaries, provides advertising, marketing, and corporate communications services. The company offers a range of services in the areas of advertising, customer relationship management, or CRM, public relations, and specialty communications. Its services comprise advertising, brand consultancy, content marketing, corporate social responsibility consulting, crisis communication, custom publishing, data analytics, database management, environmental design, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare communications, and instore design services. The company's services also include direct, entertainment, experiential, and field, interactive, mobile, multi-cultural, non-profit, promotional, retail, search engine, social media, and sports and event marketing services; and investor relations, marketing research, media planning and buying, organizational communications, package design, product placement, public affairs, public relations, and reputation consulting services. It operates in North America, Latin America, Europe, the Middle East, Africa, Australia, China, India, Japan, Korea, New Zealand, Singapore, and other Asian countries. Omnicom Group Inc. was founded in 1944 and is based in New York, New York. Company description from FinViz.com.

Omnicom reported Q3 earnings of $1.13 that beat estimates for $1.10. Revenue of $3.72 billion declined -1.9% and narrowly beat estimates for $3.71 billion.

Expected earnings Jan 16th.

Omnicom was the only advertising agency that posted decent earnings. Interpublic Group (IPG) and WPP Group (WPPGY) both lowered guidance as their biggest clients like McDonalds, Procter & Gamble, J&J, etc, all began to shrink advertising budgets. Amazon has turned into a seller of everything and companies like PG and JNJ are suffering from product price declines and less buying from normal wholesale customers.

McDonalds said this week they were going to review their $2 billion advertising budget and see how much they needed to divert to social sites like Instagram and Facebook. The advertising being served on Facebook does not need a multibillion dollar ad agency to place it. Everything is online and companies have instant access to more than 3 billion consumers between Facebook, YouTube and the Google Chrome browser. The historical advertising business is undergoing a revolution.

Shares of OMC have declined to a two-year low and with the other companies lowering guidance and Facebook posting blowout advertising numbers tonight, we could see lower lows on OMC.

Position 11//2/17:

Long $65 put @ $1.70, see portfolio graphic for stop loss.

PG - Procter & Gamble - Company Profile


PG pushed through initial resistance and I am recommending we close this position. The tide has turned.

Original Trade Description: October 28th.

The Procter & Gamble Company provides branded consumer packaged goods to consumers in the United States, Canada, Puerto Rico, Europe, the Asia Pacific, Greater China, Latin America, India, the Middle East, and Africa. The company's Beauty segment offers hair care products, including conditioners, shampoos, styling aids, and treatments; and skin and personal care products, such as antiperspirant and deodorant, personal cleansing, and skin care products. It markets its products under Head & Shoulders, Pantene, Rejoice, Olay, Old Spice, Safeguard, and SK-II brands. The company's Grooming segment provides shave care products comprising female and male blades and razors, pre- and post-shave products, and other shave care products; and appliances that include electric razors and epilators under the Braun, Fusion, Gillette, Mach3, Prestobarba, and Venus brands. Its Health Care segment offers toothbrushes, toothpastes, and other oral care products; and gastrointestinal, rapid diagnostics, respiratory, vitamin/mineral/supplement, and other personal health care products under the Crest, Oral-B, Prilosec, and Vicks brands. The company's Fabric & Home Care segment provides fabric enhancers, laundry additives, and laundry detergents; and air care, dish care, P&G professional, and surface care products under the Ariel, Downy, Gain, Tide, Cascade, Dawn, Febreze, Mr. Clean, and Swiffer brands. Its Baby, Feminine & Family Care segment offers baby wipes, diapers, and pants; adult incontinence and feminine care products; and paper towels, tissues, and toilet paper under the Luvs, Pampers, Always, Tampax, Bounty, and Charmin brands. The company sells its products through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores, and pharmacies. The Procter & Gamble Company was founded in 1837 and is based in Cincinnati, Ohio. Company description from FinViz.com.

P&G survived a proxy fight from activist investor Nelson Peltz but that does not mean their problems are over. Peltz said, "I believe that there is a direct correlation between how poorly a company is doing and how big of a fight they put up." Peltz estimated the company spent $100 million in their fight to keep him off the board. He said that is a lot of money for a company to spend to keep a knowledgeable investor from seeing the real numbers inside the company. Peltz has not conceded and an official recount of the votes is being conducted.

PG reported adjusted earnings of $1.09 that beat estimates by a penny. Revenue of $16.65 billion rose only 1% and missed estimates for $16.69 billion. Revenue from their grooming business has declined for three consecutive quarters. Peltz believes the entire company is in decline and they are massaging the numbers to put some lipstick on the pig. That only works for a short time.

Earnings January 19th.

Shares have declined $5 since the Oct 18th earnings and they are on the verge of breaking below 52-week support at $86. If the market is going to weaken on post earnings depression after this week, PG could be a leader to the downside given the negative analyst views.

Position 10/31/17:

Long Jan $85 Put @ $1.88, see portfolio graphic for stop loss.

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